Choosing the Right Contracting Parties When Your Business Becomes a Franchisor

When an existing business builds a franchise network, it must be clear which companies are actually working together. The brand above the door, the person at the negotiating table and the company signing the agreement are not always one and the same. By identifying the contracting parties and allocating responsibility before drafting the agreement, you can avoid uncertainty over payments, rights and promised services.

1. Decide which company will be the franchisor

Start with your own business. Will the existing operating company also act as the franchisor, or are you considering a separate company for the franchise network? There is no single answer that suits everyone. The choice needs to take account of factors such as business risks, administration, financing and ownership of assets.

A separate company does not, in itself, guarantee that risks will remain separate. Guarantees, agreements between the companies and the way the business is actually run can affect the position. Seek advice from an accountant and a lawyer before transferring assets or obligations.

First, draw up a simple overview of the current arrangements:

• Which company runs the existing business?
• Who owns, or has the right to license, the trade mark and other rights?
• Which company employs the staff who will provide support?
• Who holds the contracts with the suppliers the franchise network will use?
• Which company will receive the franchise fees?

The company making a commitment in the franchise agreement must be in a position to fulfil it. If another group company owns the necessary rights or provides the support, the relationship between the companies needs to be documented. The franchisee should not have to guess who is responsible when a commitment is not met.

2. Distinguish the franchisee from the person behind the business

Franchising is based on a network of independent businesses. The person you meet may be the prospective owner, business manager and contact person, while the franchisee itself is a limited company.

Franchise agreements commonly require the franchisee to operate through a legal entity, and a Swedish limited company, or aktiebolag, is a common choice. This does not, however, mean that Swedish franchise legislation generally requires a limited company. Distinguish between legal requirements and the conditions you set for joining the network.

Prepare a party details sheet with the full company name, company registration number, address and contact details. Check these against up-to-date official register records. Also establish who is authorised to represent the company and whether signing requires more than one authorised signatory or a specific power of attorney.

If the prospective franchisee’s company has not yet been registered, you need to address this explicitly. Avoid putting an individual’s name in the agreement on the assumption that a future company will automatically take over. Ask a lawyer to assess who will be bound and how any subsequent change of contracting party should be handled.

Keep the company’s obligations separate from personal commitments too. If, for example, a personal guarantee is being considered, its scope and consequences must be set out separately and clearly. An agreement entered into by a limited company does not automatically make its owner personally liable for payment.

3. Assign each obligation to the right company

Once the parties have been identified, the agreement needs to reflect day-to-day operations. Draw up a responsibility table before finalising the draft agreement. Use four columns: obligation, responsible company, party carrying out the work and documentation.

For ongoing support, for example, the franchisor may be responsible to the franchisee while staff employed by another company carry out the work. For a mandatory IT system, by contrast, the supplier may contract directly with the franchisee. These arrangements have different implications for invoicing, support and claims when things go wrong.

In particular, check that:

• invoices come from the correct company under the agreed arrangements,
• the right to use the franchise concept is granted by a party entitled to do so,
• any separate agreements are identified and available,
• the agreement states which party the franchisee should direct any claims to.

Avoid using only the network’s name when describing legal responsibility. A shared name is useful for communication, but it is no substitute for an identified company in the agreement. The same clarity is needed in schedules and order forms.

4. Check the legal position before signing

Sweden has no comprehensive franchise legislation, but it does have a specific Act (2006:484) on Franchisors’ Duty to Provide Information. This requires the franchisor to provide clear, comprehensible written information about the agreement’s implications and relevant circumstances well before the agreement is entered into. Among other things, the information must cover fees and other payments, licensed intellectual property rights, and mandatory purchases or rentals.

The company structure must therefore be consistent with both the agreement and the information provided before signing. If another company will collect payments or provide a mandatory service, the financial terms need to be clear. The disclosure obligation does not replace checks on the contracting parties and their authority to act.

General legislation also applies, including the Swedish Contracts Act and, for limited companies, the Swedish Companies Act. Competition law and intellectual property law may also affect the arrangements. Make sure the final legal review covers the entire chain of agreements, not just the document headed ‘Franchise Agreement’.

Practical takeaway: Prepare the party details sheet and responsibility table first. Only proceed to signing once every right, payment and contractual obligation can be linked to the correct company and an authorised representative.